B-316048, Applicability of the Congressional Review Act to Letter on State Children's Health Insurance Program, April 17, 2008

B-316048

April
17, 2008

The Honorable John D. Rockefeller, IV

Chairman

Subcommittee on Health Care

Committee on Finance

United States Senate

The Honorable Olympia Snowe

Committee on Finance

United States Senate

Subject: Applicability of the Congressional Review
Act to Letter on State Children’s Health Insurance Program

By letter of February 13, 2008, you asked whether an August 17, 2007
letter issued by the Centers for Medicare & Medicaid Services (CMS) to
state health officials concerning the State Children’s Health Insurance Program
is a rule for the purpose of section 251 of the Contract with America
Advancement Act of 1996,[1] commonly referred to as the Congressional Review Act (the Review Act). The Review Act is intended to keep
Congress informed of the rulemaking activities of federal agencies and provides
that before a rule can take effect, the agency must submit the rule to each House
of Congress and the Comptroller General.[2] For
the reasons discussed below and more fully explained in the enclosure, we
conclude that the August 17, 2007 letter is a rule under the Review Act. Therefore, it must be submitted to Congress and
the Comptroller General before it can take effect.

BACKGROUND

The State Children’s Health Insurance Program (SCHIP) finances health
care to
low-income, uninsured children whose family incomes exceed the eligibility
limits under their state’s Medicaid program, but who cannot afford other health
insurance coverage.[3] To participate in SCHIP, a state must submit
a plan that describes how its program meets applicable requirements and must receive
approval of the plan from CMS.[4]
States are required to amend their plans
to reflect changes in federal law, regulation, or policy, and changes in the
operation of their programs, including, for example, changes in eligibility
criteria or benefits. [5]

As required by law, a state plan must describe the procedures used to
ensure that coverage under the plan does not substitute for coverage under
group health plans, generally referred to as “crowd out.”[6] Regulations promulgated by CMS require states
to adopt “reasonable procedures” to prevent crowd out.[7] Since CMS promulgated the regulations in 2001,
states have adopted a number of different measures to prevent crowd out, which
CMS has approved.

In its August 17 letter, CMS purports to clarify the statutory and
regulatory requirements concerning prevention of crowd out for states wishing
to provide SCHIP coverage to children with effective family incomes in excess
of 250 percent of the federal poverty level (FPL) and identifies a number of
particular measures that these states should adopt. The letter indicates that CMS will apply the
measures to states’ proposals to cover such children, as well as to states that
already cover them. According to the
letter, CMS may take corrective action against states that fail to adopt the identified
measures within 12 months.

SUMMARY OF ANALYSIS

The definition of “rule” in the
Review Act incorporates by reference the definition of “rule” in the Administrative
Procedure Act (APA), with some exceptions.
Our analysis of whether the August 17 letter is a rule under the Review Act
thus entails determining whether the letter is a rule under the APA and whether
it falls within any of the exceptions contained in the Review Act. [8] The APA definition of rule has been
said to include “nearly every statement an agency may make.”[9] It includes three elements that are relevant
here: an agency statement is a rule if
it is of general applicability; of future effect; and designed to implement,
interpret, or prescribe law or policy.

On its face, the August 17 letter meets
these criteria. The letter is of general,
rather than particular, applicability since it extends to all states that seek
to enroll children with effective family incomes exceeding 250 percent of the
FPL in their SCHIP programs, as well as to all states that have already
enrolled such children.[10] In addition, it is prospective in nature
since it is concerned with policy considerations for the future rather than the
evaluation of past or present conduct.[11] Finally, it purports to clarify and explain the
manner in which CMS applies statutory and regulatory requirements to states
that want to extend coverage under their SCHIP programs to children with
effective family incomes above 250 percent of the FPL and seeks to promote the implementation of statutory
requirements applicable to state plans.
Accordingly, it is designed to implement, interpret, or prescribe law or
policy.[12]

The history of the regulatory
provision regarding substitution of coverage discussed in the letter lends
support to our view that the letter is a rule.
In the preamble to the proposed rule to implement SCHIP, CMS indicated
that it could not require states to adopt any particular measures as part of
the effort to prevent substitution of coverage, stating that it did not have a
statutory or empirical basis for doing so.[13] CMS confirmed this interpretation in a final
rule. [14] In its August 17 letter, however, CMS states
that its experience and information derived from the operation of SCHIP
programs have made it clear that the potential for substitution is greater at
higher income levels, and states seeking to expand their SCHIP populations
should implement specific strategies as “reasonable procedures” to prevent
substitution of coverage (for example, a minimum 1-year period of uninsurance
before receiving SCHIP coverage). Thus, the
letter amounts to a marked departure from the agency’s settled interpretation
of the governing regulation, and case law indicates that such a change may be
made only by a rule.[15] Moreover, the agency expressly relied on the
letter to disapprove a request from the state of New York
to amend its SCHIP plan to cover children with family incomes up to 400 percent
of the FPL. The application of the letter
to deny New York’s proposed plan
amendment only serves to confirm that the letter has binding effect and is,
therefore, a rule.[16]

By letter of February 20, 2008, we requested the views of the
General Counsel of the Department of Health and Human Services on whether the
August 17 letter is a rule for purposes of the Review Act.[17] The response from the Director of the Center
for Medicaid and State Operations within CMS did not directly address that
issue. CMS indicated, however, that the letter
is a “general statement of policy that announces the course which the agency
intends to follow in adjudications concerning compliance with requirements
already set forth in regulations.”

As a conceptual matter, general
statements of policy would appear to fit squarely within the definition of rule
in the APA since they advise the public prospectively of the manner in which an
agency proposes to exercise a discretionary power or what the agency will
propose as policy,[18]
and, in fact, courts have referred to them as rules.[19] While some cases seem to suggest that general
statements of policy are not rules under the APA,[20] the
better reading of these cases, in our opinion, is that statements of policy are
not the type of rules for which the APA requires notice and comment procedures
because they are tentative statements of future intent and by their nature do
not have the force of law. Further, even
if these cases are read to mean that general statements of policy are not rules
under the APA, the August 17 letter does not have the characteristics of a
general statement of policy identified in case law. Because the letter establishes a deadline by
which “affected States” need to implement its measures or face the possibility
of a corrective action by the agency, the letter evidences little, if any, of
the tentativeness that is the hallmark of a policy statement.[21] Finally, as noted above, the agency has relied
on the letter to disapprove a state plan amendment, treating the letter as if
it were a binding rule.

CONCLUSION

The August 17 letter from CMS to
state health officials is a statement of general applicability and future
effect designed to implement, interpret, or prescribe law or policy with regard
to SCHIP. Accordingly, it is a rule
under the Congressional Review Act.
Therefore, before it can take effect, it must be submitted to Congress and
the Comptroller General.

If you have any questions
concerning this opinion, please contact Dayna K. Shah, Managing Associate
General Counsel, at (202) 512-8208; Helen T. Desaulniers, Assistant General
Counsel, at (202) 512-4740; or Kevin C. Milne, Deputy Assistant General
Counsel, at (202) 512-4586.

Gary L. Kepplinger
General Counsel

Enclosure

cc:

James Stansel, Esq.
Acting General Counsel
Department of Health and Human Services

Jennifer Luong
Counselor on Oversight to the Assistant Secretary
Office of the Assistant Secretary for Legislation
Department of Health and Human Services

B-316048

ENCLOSURE

Applicability of the
Congressional Review Act to Letter on

State Children’s Health
Insurance Program

The Centers for
Medicare and Medicaid Services (CMS) issued a letter dated August 17,
2007 to certain
state agencies concerning the State Children’s Health Insurance Program. For the reasons discussed below, we conclude
that the August 17 letter is a “rule” for the purpose of section 251 of the
Contract with America Advancement Act of 1996,[22]
commonly referred to as the Congressional Review Act (the Review Act). Therefore, in accordance with the Review Act,
the letter must be submitted to Congress and the Comptroller General before it
can take effect.

BACKGROUND

The State Children’s
Health Insurance Program

The State Children’s
Health Insurance Program (SCHIP), created in 1997, finances health care to
low-income, uninsured children whose family incomes exceed the eligibility
limits under their state’s Medicaid program, but who cannot afford other health
insurance coverage.[23] Like Medicaid, SCHIP is financed jointly by
contributions from the federal government and the states. Under Medicaid, the federal government matches
a portion of each state’s Medicaid expenditures according to a matching rate
that is based in part on the state’s per capita income relative to the national
average.[24] Under SCHIP, the federal government also
matches a state’s SCHIP expenditures, but at a rate that is generally higher
than the Medicaid matching rate.[25]

To participate in
SCHIP, a state must submit a state plan and must receive approval of the plan
from CMS.[26] A state plan is a comprehensive written
description of the operation of the state’s SCHIP program, including
eligibility standards and benefits provided, in sufficient detail for CMS to
determine whether the plan meets applicable requirements.[27] The plan also assures CMS that the state will
administer its program in accordance with those requirements.[28] Regulations require states to amend their
state plans whenever necessary to reflect changes in federal law, regulations,
policy interpretations, or court decisions, as well as changes in the operation
of their programs, including, for example, changes in eligibility criteria or
benefits. [29]

States have
considerable flexibility under SCHIP in structuring their programs. They may expand their existing Medicaid
programs to provide coverage to children who are eligible under SCHIP. Alternatively, they may implement separate
child health programs. In addition, a
state may have a combination of both a separate child health program and a
Medicaid expansion.[30]

State SCHIP programs
are subject to a number of statutory provisions that are designed to ensure
that SCHIP coverage does not become a substitute for other public or private coverage. For example, section 2102(b)(3)(C) of the
Social Security Act requires that a state plan include a description of the procedures
used to ensure that state SCHIP coverage does not substitute for health
insurance coverage under group health plans.[31] Under section 2102(c)(2) of the Social
Security Act, states also must describe in their plans the procedures used to
coordinate their SCHIP programs with other public and private programs.[32]

CMS has promulgated
regulations designed to implement the statutory provisions to prevent
substitution of coverage.[33] Among the regulations promulgated, section
457.805 of title 42, Code of Federal Regulations, requires that a state plan
include a description of “reasonable procedures” to ensure that coverage provided
under the state plan does not substitute for coverage provided under group
health plans, referred to as “crowd out” provisions. Over time, states have proposed, and CMS has
approved, a number of different measures to prevent substitution of coverage.

The August 17, 2007 Letter

On August 17, 2007, CMS issued a letter to state health officials (SHO
#07-001) for the stated purpose of clarifying how CMS “applies existing
statutory and regulatory requirements” for states that want to extend coverage
under their SCHIP programs to children in families with effective family
incomes above 250 percent of the federal poverty level (FPL). Specifically, the letter indicates that it is
“clarifying that the reasonable procedures adopted by States to prevent crowd-out
pursuant to 42 C.F.R. 457.805 should include . . . five general crowd-out
strategies with certain important components.”
The five crowd out strategies identified in the letter are:

imposing cost sharing in
approximation to the cost of private coverage;

monitoring health insurance status at the
time of application;

verifying family insurance status through
insurance databases; and

preventing employers from changing
dependent coverage policies that would favor a shift to public coverage.

In addition, the letter indicates that CMS “will expect”
that these states incorporate the following components into their strategies to
prevent substitution of coverage:

the cost sharing requirement under the
state plan compared to the cost sharing required by competing private plans
must not be more favorable to the public plan by more than 1 percent of the
family income, unless the public plan’s cost sharing is set at the 5 percent
family cap;

the state must establish a minimum of a 1-year
period of uninsurance for individuals prior to receiving coverage; and

monitoring and verification must include
information regarding coverage provided by a noncustodial parent.

The letter also indicates that CMS will seek a number of
assurances from states, including an assurance that the state has enrolled at
least 95 percent of the children in the state with family incomes below 200
percent of the FPL who are eligible for SCHIP or Medicaid.

According to the August 17 letter, CMS will expect states
that seek to amend their SCHIP state plans and section 1115 demonstrations[34]
to cover children with effective family incomes above 250 percent of the FPL to
include these specific measures.
Furthermore, the letter indicates that CMS will apply the “review
strategy” described in the letter to instances in which SCHIP plans and section
1115 programs already include these children.
The letter indicates that states will be expected to amend their SCHIP plans
or section 1115 demonstration programs in accordance with the provisions of the
review strategy within 12 months or CMS “may pursue corrective action.”

DISCUSSION

The Review Act is intended to
keep Congress informed about the rulemaking activities of federal agencies and
to allow for congressional review of rules.[35] The Review Act provides that before a rule
can take effect, the agency promulgating the rule must submit to each House of
Congress and the Comptroller General a report containing a copy of the rule; a
concise general statement concerning the rule, including whether it is a major
rule; and the proposed effective date of the rule.[36] Among other things, the Review Act sets forth
a procedure for congressional disapproval of agency rules, specifically a joint
resolution of disapproval effective upon signature by the President. The Review Act provides that no
determination, finding, action, or omission under the Review Act shall be
subject to judicial review.[37]

The definition of the term “rule” in the Review Act
incorporates by reference the definition in the Administrative Procedure Act
(APA), with some exceptions. Our
analysis of whether the August 17 letter is a rule under the Review Act thus
entails determining whether it is a rule under the APA and whether it falls
within any of the exceptions contained in the Review Act.[38] The APA definition of rule has been said to
include “nearly every statement an agency may make.”[39] This definition is as follows:

[T]he whole or a part of an agency
statement of general or particular applicability and future effect designed to
implement, interpret, or prescribe law or policy or describing the
organization, procedure, or practice requirements of an agency and includes the
approval or prescription for the future of rates, wages, corporate or financial
structures or reorganizations thereof, prices, facilities, appliances, services
or allowances therefor or of valuations, costs, or accounting, or practices
bearing on any of the foregoing[.][40]

Agency statements that create binding legal norms--those
that, for example, grant rights, impose obligations, or affect private
interests--are rules under the APA.[41] These rules--usually called legislative
rules--generally must be promulgated through notice and comment rulemaking
procedures under 5 U.S.C. sect. 553. Courts
have found that other agency pronouncements also are rules as defined in 5
U.S.C. sect. 551, even if they do not create binding legal norms and are not
subject to notice and comment rulemaking requirements under section 553. For example, agency guidance documents and
manuals have been held to be rules.[42] Agency documents that clarify or explain
existing legal requirements also have been held to be rules.[43] Whether a particular agency pronouncement is
a rule under section 551, therefore, does not turn on whether the rule is
subject to notice and comment rulemaking requirements under section 553.

Legislative history of the Review
Act confirms that the Review Act is intended to include within its purview
almost all rules that an agency issues and is not limited to those rules that
must be promulgated according to the notice and comment requirements in section
553 of the APA. In his floor statement
during final consideration of the bill, Representative McIntosh, a principal
sponsor of the legislation, pointed out that rules subject to congressional
review are not just those rules subject to APA notice and comment requirements:

Although agency interpretive rules,
general statements of policy, guideline documents, and agency policy and
procedure manuals may not be subject to the notice and comment provisions of
section 553(c) of title 5, United States Code, these types of documents are
covered under the congressional review provisions of the new chapter 8 of title
5.

Under section 801(a), covered
rules, with very few exceptions, may not go into effect until the relevant
agency submits a copy of the rule and an accompanying report to both Houses of
Congress. Interpretive rules, general
statements of policy, and analogous agency policy guidelines are covered
without qualification because they meet the definition of a ‘rule’ borrowed
from section 551 of title 5, and are not excluded from the definition of a
rule.[44]

Our prior opinions on the status of agency pronouncements
under the Review Act reflect the breadth of the term “rule,” applying a
definition of the term that reaches pronouncements beyond those that require
notice and comment rulemaking.[45]

The APA definition of rule includes three elements relevant to
our consideration of whether the August 17 letter is a rule: an agency statement is a rule if it is of
general applicability; of future effect; and designed to implement, interpret,
or prescribe law or policy. An examination
of the text of the letter itself indicates that it meets these criteria. The letter is of general, rather than
particular, applicability since it extends to all states that seek to enroll
children with effective family incomes exceeding 250 percent of the FPL in
their SCHIP programs, as well as to all states that have already enrolled such
children.[46] In addition, it is of future effect since it
concerns policy considerations for the future rather than the evaluation of
past and present conduct.[47] Further, by its own terms, the letter
purports to clarify and explain statutory and regulatory requirements. The very first sentence explains that the
letter “clarifies how [CMS] applies existing statutory and regulatory
requirements” with regard to requests from states to extend coverage under
SCHIP to children with effective family incomes above 250 percent of the FPL. The letter also purports to explain the
requirements under 42 C.F.R. sect. 457.805 regarding state efforts to prevent
substitution of coverage and the measures that states seeking to cover these
populations should take to prevent substitution of coverage. In addition, the letter indicates that the requested
assurances help ensure the coordination of SCHIP coverage with other coverage,
thus indicating that the assurances promote the implementation of one of the
statutory objectives for state plans.[48] In particular, it indicates that states that
already have included coverage under their SCHIP programs for children with
effective family incomes above 250 percent of the FPL are expected to adjust
their state plans accordingly. Because
the letter purports to provide an explanation of statutory and regulatory
requirements and to explain how the provisions adopted effectuate both legal
requirements and policy choices attendant to administration of SCHIP, the
document on its face is designed to implement, interpret, or prescribe law or policy
within the meaning of section 551(4) of the APA.

The history of 42 C.F.R. sect. 457.805, the regulation that the August
17 letter purports to clarify, supports our view that the letter is a
rule. In the preamble to the proposed
rule to implement SCHIP, CMS considered whether to require states to adopt a
set of particular measures to prevent substitution of coverage and expressly
declined to impose such a requirement. CMS concluded that, based on its
interpretation of the governing statute and evidence, it did not have a basis
upon which to require such measures. CMS
explained its position as follows:

The other option that we considered
was to require a set of specific procedures that each State would have to use
to address substitution [of coverage].
We rejected this option because the statute authorizes States to design
approaches to prevent substitution, not the Federal government. We also recognized that there is not
substantial evidence favoring any specific approach to reduce the potential for
substitution.[49]

CMS confirmed this interpretation in a final rule.[50] The August 17 letter, however, explains that
CMS’s experience and information derived from the operation of SCHIP programs
have made it clear that the potential for substitution is greater at higher
income levels. The letter further states
that CMS will expect states to undertake five specific measures, include three
components as part of those measures, and make three additional assurances in
order to cover children with effective family incomes above 250 percent of the
FPL under SCHIP. In this respect, the
letter amounts to a marked departure from the agency’s interpretation of the
regulation regarding substitution of coverage in the preambles to the proposed
and final rules. Accordingly, because of
this new regulatory interpretation and because an agency may only change a
settled interpretation of its own rules through the promulgation of an amending
rule, the letter serves the same purpose as a rule.[51]

CMS’s application of the August 17 letter only serves to
confirm that the letter has binding effect and is, therefore, a rule. In April 2007, the state of New
York requested permission from CMS to amend its SCHIP
plan to provide coverage to children with family incomes up to 400 percent of
the FPL. CMS expressly relied on the
August 17 letter to deny the request. In
a letter dated September 7, 2007
to the state of New York, CMS
stated, in part, the following:

New York
has not demonstrated that its program operates in an effective and efficient
manner with respect to the core population of targeted low-income
children. Specifically, it has failed to
provide assurances that the State has enrolled at least 95 percent of the
children in the core targeted low-income child population, those with family
incomes below 200 percent of the FPL. As
outlined in an August 17, 2007,
letter to State Health Officials, such assurances are necessary to ensure that
expansion to higher income populations does not interfere with the effective
and efficient provision of child health assistance.

In explaining the applicable requirements under 42 C.F.R. sect.
457.805, CMS went on to state additional grounds for its denial of New
York’s request to amend its SCHIP plan:

At the high proposed family income
eligibility levels, reasonable procedures [to prevent substitution of coverage]
should include a full range of procedures to discourage substitution. New York’s
proposal does not include procedures to prevent such substitution that include
a 1-year period of uninsurance for populations over 250 percent of the
FPL. Additionally, New York’s proposed
cost sharing has not met the requirement that cost sharing under the State plan
compared to cost sharing required by competing private plans not be more
favorable to the public plan by more than 1 percent of the family income, nor
has the State proposed to set its cost sharing at the 5 percent family cap. . .
.

For these reasons . . . I am unable
to approve this [State Plan Amendment] for expanding coverage. This disapproval is consistent with the August 17, 2007 letter to State
Health Officials discussing how these existing statutory and regulatory
requirements should be applied to all States expanding SCHIP effective
eligibility levels above 250 percent of the FPL.

CMS’s action demonstrates that the letter represents the
agency’s decision to bind itself to the application of the letter’s terms and
to give the letter present and binding effect.[52]

By letter of February
20, 2008, we requested the views of the General Counsel of the
Department of Health and Human Services (HHS) on whether the August 17 letter
is a rule for purposes of the Review Act.[53] The written response from the Director of the
Center for Medicaid and State Operations within CMS did not address this
issue. The response stated that it would
be inappropriate to address legal issues related to the August 17 letter because
the letter is the subject of a number of lawsuits.[54] Nevertheless, CMS indicated that the August
17 letter is a “general statement of policy that announces the course which the
agency intends to follow in adjudications concerning compliance with requirements
already set forth in regulations.” The
agency also referred us to a document prepared by the Department of Justice,
which asserted that the August 17 letter was a general statement of policy.

The agency’s characterization of the August 17 letter as a general statement of
policy raises one issue relevant to our consideration: whether a general statement of policy is a
rule under section 551(4) of the APA.[55] The term “general statements of policy” is
not defined in the APA or in its legislative history. The Attorney General’s Manual on the
Administrative Procedure Act, which the United States Supreme Court has
frequently referred to as an authoritative source for interpreting provisions
of the APA,[56]
defines the term as “statements issued by an agency to advise the public
prospectively of the manner in which the agency proposes to exercise a
discretionary power.”[57] A statement of policy, therefore, as the U.S.
Court of Appeals for the District of Columbia Circuit has stated, announces the
agency’s tentative intentions for the future, and “what the agency seeks to
establish as policy.”[58] In this way, the general statement of policy
serves a number of useful functions, including the facilitation of long range
planning within the regulated industry and the promotion of uniformity in areas
of national concern.[59]

Section 551(4) includes within the meaning of rule a statement
of general or particular applicability and future effect designed to implement,
interpret, or prescribe law or policy. As a device that provides information on the
manner in which an agency will exercise its authority or what the agency will
seek to propose as policy, a general statement of policy would appear to fit
squarely within this category. Further,
in discussing policy statements under the APA, courts have referred to them as
rules.[60]

Nevertheless, some court decisions seem to suggest that
general statements of policy are not rules under the APA, which would raise, of
course, the question whether they are rules under the Review Act.[61] The holdings of these cases did not address
whether the agency pronouncements were rules for the purpose of section 551,
but, instead, whether they were rules that should have been promulgated
according to notice and comment rulemaking requirements under section 553 or
whether they were subject to review. The
better reading of these cases, in our opinion, is not that general statements
of policy are not rules under 551, but that statements of policy are not legislative rules because they are tentative
statements of future intent and by their nature do not have the force of
law.

Even if general statements of policy are not rules for
purposes of section 551, however, the August 17 letter does not qualify as a
general statement of policy. In determining
whether a particular agency pronouncement is a general statement of policy,
courts begin with the language of the document itself and the agency’s own
characterization of the pronouncement.[62] Although courts give deference to an agency’s
characterization, the label that an agency puts on the exercise of its
administrative power is not conclusive. [63] In general, if the language of the
pronouncement indicates that the agency’s views are tentative or simply a guide
as to how the agency may exercise its authority, and the agency in fact does
not treat the statement as a binding norm, then the document may be a policy
statement. If, however, the document,
either by its terms or as applied by the agency, imposes requirements or
obligations, it would not be considered a general statement of policy.

One case in particular, cited by the Department of Justice
in the memorandum included in CMS’s response to our request for the agency’s
views, provides a useful explanation of the type of language typically found in
an agency general statement of policy.
In Pacific Gas and Electric Co. v.
Federal Power Commission,[64]
the United States Court of Appeals for the District of Columbia Circuit
determined that a Federal Power Commission pronouncement was a general statement
of policy exempt from notice and comment rulemaking requirements. The pronouncement, styled a “statement of
policy,” expressed the Commission’s view of how deliveries of natural gas
should be prioritized during periods of shortage. The pronouncement stated that the Commission
intended to follow this priority schedule unless a particular pipeline company
demonstrated that a different curtailment plan (governing allocation of
available supply among customers) better served the public interest. After the statement was issued, a number of
parties objected to the Commission’s statement, most of whom were the natural
gas customers that had been assigned a low priority under the priority
schedule. Among their objections was the
claim that the statement was in effect a substantive rule, and not a statement
of policy.

In reaching its conclusion that the statement was indeed a
statement of policy, the court noted the tentative nature of the statement, as
well as the Commission’s acknowledgment that any particular decisions on
curtailment could only be made in further proceedings. Specifically, the court found it significant
that the statement indicated it was the curtailment policy that the Commission
“proposes to implement” and the “plan preferred by the Commission,” which “will
serve as a guide in other proceedings.”
The Commission itself intended the statement only “to state initial
guidelines as a means of facilitating curtailment planning and the adjudication
of curtailment cases.” In addition, the
statement also indicated that, although it informed the public of the types of
plans the Commission might approve, there was no assurance that any such plan
would be approved. Finally, the court noted that the statement indicated that
during subsequent proceedings to determine particular curtailments, affected
parties would have an opportunity not only to challenge the merits of the
proposed plan, but to demonstrate that the plan was inappropriate in particular
circumstances. In effect, the Commission
statement was a starting point to frame consideration of future proposals.

If we analyze CMS’s August 17 letter using the criteria used
by the court to determine that the Commission’s pronouncement was simply a
statement of policy, we conclude that the letter does not meet the criteria. The August 17 letter evidences little, if any,
language of tentativeness or inconclusiveness. The specific measures are not
characterized as “proposals” or measures that are under development or to be
implemented or adopted by later action.
On the contrary, the letter sets forth specific strategies that states
seeking to expand their SCHIP populations should implement as “reasonable
procedures” to prevent substitution of coverage. While states previously identified and
adopted one or more of the specified strategies, the August 17 letter indicates
that all of them should be included as “reasonable procedures.” There is no indication that the strategies
are only guidelines that may or may not be applied in subsequent proceedings. In addition, the letter contains no express
mention that exceptions will be considered in particular instances. Finally, the time frame specified in the
letter for states to conform to the CMS “review strategy” evidences the
agency’s intention to give the letter present and binding effect:

CMS will apply this review strategy to
SCHIP state plans and section 1115 demonstration waivers that include SCHIP
populations, and will work with States that currently provide services to
children with effective family incomes over 250 percent of FPL. We expect affected States to amend their
SCHIP state plan (or 1115 demonstration) in accordance with this review
strategy within 12 months, or CMS may pursue corrective action.

If the letter were simply precatory or tentative in nature,
then there would be no need to establish a deadline by which states would need
to implement the measures in the letter or face the possibility of a corrective
action by the agency.[65] The inference to be drawn from the letter,
therefore, is that states that do not conform to or adopt the measures
described in the letter will likely be found to be not in compliance with SCHIP
requirements.

In addition to the particular language of a statement,
courts look to an agency’s actions in relation to the statement to determine
whether it is a general statement of policy.
As a number of courts have noted, a critical test of whether a rule is a
general statement of policy is its practical effect in a subsequent
administrative proceeding. In subsequent
proceedings, if the agency relies solely on the pronouncement itself to
determine rights and obligations of others, the agency has treated the policy
statement as if it were a binding rule, not a general statement of policy.[66] As we explained above, CMS’s express reliance
on the August 17 letter to deny the state of New York’s
request to amend its SCHIP plan leads us to conclude that the letter is not a
policy statement. Our conclusion that
the August 17 letter is not a general statement of policy is reinforced by our
observation that it reflects a significant change in the agency’s settled
interpretation of 42 C.F.R. sect. 457.805, which policy statements by their nature
do not do.[67]

CONCLUSION

Based on our analysis of the August 17, 2007 letter to state health officials, it is
our opinion that the letter is a rule for the purpose of the Review Act. The letter, as discussed above, is a statement
of general applicability and future effect designed to implement, interpret, or
prescribe law or policy with regard to the SCHIP program. Furthermore, we do not believe that the
August 17 letter comes within any of the exceptions to the definition of rule
contained in the Review Act.

We express no opinion on the applicability of any other
legal requirements, including, but not limited to, notice and comment
rulemaking requirements under the APA, or whether the August 17 letter would be
a valid interpretation of statutes or regulations. As a legal matter, the resolution of such
issues is not necessary to our determination whether the August 17 letter is a
rule for purposes of the Review Act.

Accordingly, given our conclusions above, and in accordance
with the provisions of 5 U.S.C. sect. 801(a)(1), the letter must be submitted
to Congress and the Comptroller General before it can take effect.

[4]
42 U.S.C. sect. 1397aa(b). The authority
vested in the Secretary of Health and Human Services to approve and disapprove
SCHIP state plans and plan amendments has been delegated to the Administrator
of CMS. State Child Health; Implementing
Regulations for the State Children’s Health Insurance Program, 64 Fed. Reg.60882, 60895
(Nov. 8, 1999) (proposed rule).

[8] The Review Act excepts the following from its definition
of rule: (1) rules of particular
applicability, including a rule that approves or prescribes for future
application rates, wages, prices, services, or allowances therefor, corporate
or financial structures, reorganizations, mergers, or acquisitions thereof, or
accounting practices or disclosures bearing on any of the foregoing; (2) rules
relating to agency management or personnel; and (3) rules of agency
organization, procedure, or practice that do not substantially affect the
rights or obligations of non-agency parties.
5 U.S.C. sect. 804(3). As discussed
below, the letter is not a statement of particular applicability; rather, it
substantially affects all states that seek to cover children with effective
family incomes in excess of 250 percent of the FPL, as well as those states
that already cover these children. The
letter does not relate to agency management or personnel, and it does not
relate to “agency organization, procedure, or practice” with no substantial
effect on non-agency parties.
Accordingly, we do not believe that any of these three exceptions applies
to the August 17 letter.

[9]Batterton v. Marshall, 648 F.2d 694, 700 (D.C. Cir. 1980) (citing 5 U.S.C. sect. 551(4)). Section 551(4) of title 5, United States
Code, defines the term “rule” in relevant part as “[t]he whole or a part of an
agency statement of general or particular applicability and future effect
designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice
requirements of an agency . . . .”

[10]Cf. U.S. Dep’t of Justice, Attorney
General’s Manual on the Administrative Procedure Act 13 (1947) (the term “rule” includes statements
of particular applicability applying either to a class or to a single person).

[11]See Bowen v. Georgetown University
Hospital, 488 U.S. 204, 216 (1988)
(Scalia, J., concurring) (“future effect” means that agency statement will have
legal consequences for the future); see
also U.S. Dep’t of Justice, Attorney General’s Manual on the Administrative
Procedure Act at 14 (rulemaking
regulates the future conduct of either groups of persons or a single person and
is essentially legislative in nature because it operates in the future and is
primarily concerned with policy considerations, while adjudication is concerned
with the determination of past and present rights and liabilities).

[15]See SBC Inc. v. Federal Communications
Commission, 414 F.3d 486, 498 (3d Cir. 2005) (if agency’s present
interpretation of regulation is a fundamental modification of previous
interpretation, the modification can only be accomplished through notice and
comment rulemaking); Shell Offshore Inc.
v. Babbitt, 238 F.3d 622, 629 (5th Cir. 2001) (settled policy of an agency is
binding on the agency and may be changed only through a rule); Alaska Professional Hunters Ass’n v. Federal
Aviation Administration, 177 F.3d 1030, 1033-34 (D.C. Cir. 1999) (an agency
is bound by settled interpretation given to its own regulation that agency can
change only by rulemaking).

[16]See Appalachian Power Co. v. Environmental
Protection Agency, 208 F.3d 1015,
1020-21 (D.C. Cir. 2000) (if an agency treats a pronouncement as if it were
controlling, if it bases enforcement actions on the policies in the document,
and if it leads private parties or states to believe it must comply with the
pronouncement’s terms, it is a substantive rule, not a general statement of
policy); Guardian Federal Savings and
Loan Ass’n, 589 F.2d at 666 (in
subsequent administrative proceeding, agency cannot claim that prior statement
of policy itself resolves contested issues).

[18]See U.S. Dep’t of Justice, Attorney
General’s Manual on the Administrative Procedure Act at 30, n.3.

[19]See, e.g.,Chrysler v. Brown, 441 U.S. 281, 301 (1979) (“the central
distinction among agency regulations found in the APA is that between
‘substantive rules’ on the one hand and ‘interpretive rules, general statements
of policy, or rules of agency organization, procedure, or practice’ on the
other”); Noel v. Chapman, 508 F.2d 1023, 1030 (2d Cir. 1975) (general
statement of policy is a rule directed at agency staff on how it will perform
discretionary function); Guardian Federal
Savings and Loan Ass’n, 589 F.2d at
666 (describing test for determining whether “a rule is a general statement of
policy”).

[23]See 42 U.S.C. sect. 1397aa. Medicaid finances health care for certain
low-income families, children, pregnant women, elderly persons, and persons
with disabilities. In general, under
SCHIP, a state is allowed to cover children in families with incomes up to 200
percent of the federal poverty level or 50 percentage points above the
state’s Medicaid income eligibility limit as of March 31, 1997. See
42 U.S.C. sections1397jj(b)(1) and (c)(4).

[26]
42 U.S.C. sect. 1397aa(b). The authority
vested in the Secretary of Health and Human Services to approve and disapprove
SCHIP state plans and plan amendments has been delegated to the Administrator
of CMS. State Child Health; Implementing
Regulations for the State Children’s Health Insurance Program, 64 Fed. Reg.60882, 60895
(Nov. 8, 1999) (proposed rule).

[31]
42 U.S.C. sect. 1397bb(b)(3)(C). CMS explained
in the preamble to a final rule implementing SCHIP that the potential for
substitution of SCHIP coverage for private coverage exists because SCHIP
coverage may be less expensive than private coverage or provide better coverage
than some individuals or employers could purchase with their own funds. SeeState Child Health; Implementing Regulations for the State Children’s Health
Insurance Program, 66 Fed. Reg. 2490, 2602 (Jan. 11, 2001) (final rule).

[36]
5 U.S.C. sect. 801(a)(1). On the date the report is submitted, the agency also must
submit to the Comptroller General and make available to each House of Congress
certain other documents, including a cost-benefit analysis, if any, and agency
actions relevant to the Regulatory Flexibility Act and the Unfunded Mandates
Reform Act of 1995, and any other relevant information or requirements under
any other legislation or any relevant executive orders. 5 U.S.C. sect. 801(a)(1)(B)(i)-(iv). For rules that federal agencies identify as
major rules, the Comptroller General is required under the Review Act to
provide a report to the committees of jurisdiction in each House on whether the
agency complied with certain procedural requirements. 5 U.S.C. sect. 801(a)(2)(A).

[37]
5 U.S.C. sect. 805. A number of federal
courts have concluded that an agency’s failure to submit a rule in accordance
with the Review Act is not reviewable. SeeAmerican
Electric Power Service Corp., 2006 WL 1331543, at *13; United States v. American Electric Power Service Corp., 218 F. Supp.
2d 931, 949 (S.D. Ohio 2002); Texas Savings & Community Bankers Ass’n, 1998
WL 842181, at *7. One court has ruled
that the Review Act does not preclude review of the agency’s failure to submit
a rule as required by the Review Act. SeeSouthern Indiana
Gas and Electric Co., 2002 WL 31427523, at *5–*6.

[38]
The Review Act excepts the following from its definition of rule: (1) rules of particular applicability,
including a rule that approves or prescribes for future application rates,
wages, prices, services, or allowances therefor, corporate or financial
structures, reorganizations, mergers, or acquisitions thereof, or accounting
practices or disclosures bearing on any of the foregoing; (2) rules relating to
agency management or personnel; and (3) rules of agency organization,
procedure, or practice that do not substantially affect the rights or
obligations of non-agency parties. 5
U.S.C. sect. 804(3). As discussed below, the
letter is not a statement of particular applicability; rather, it substantially
affects all states that seek to cover children with effective family incomes in
excess of 250 percent of the FPL, as well as those states that already cover
these children. The letter does not
relate to agency management or personnel, and it does not relate to “agency
organization, procedure, or practice” with no substantial affect on non-agency
parties. Accordingly, we do not believe
that any of these three exceptions applies to the August 17 letter.

[45]See, e.g., B-287557, May 14, 2001 (“record
of decision” issued by the Fish and Wildlife Service of the Department of
Interior in connection with a federal irrigation project was a rule); B-274505,
September 16, 1996 (memorandum issued by Secretary of Agriculture in connection
with the Emergency Salvage Timber Sale Program was a rule).

[46]Cf. U.S.
Dep’t of Justice, Attorney General’s Manual on the Administrative Procedure Act
13 (1947) (the term “rule” includes
statements of particular applicability applying either to a class or to a
single person).

[47]SeeBowen v. Georgetown University
Hospital, 488 U.S. 204, 216 (1988)
(Scalia, J., concurring) (“future effect” means that statement will have legal
consequences for the future); see also U.S.
Dep’t of Justice, Attorney General’s Manual on the Administrative Procedure Act
at 13-14 (rulemaking regulates the future conduct of either groups of
persons or a single person and is essentially legislative in nature because it
operates in the future and is primarily concerned with policy considerations,
while adjudication is concerned with the determination of past and present
rights and liabilities.)

[48] Among the statutory provisions that the letter
expressly refers to is section 2101(a) of the Social Security Act, which
provides, in pertinent part:

Purpose.–The purpose of this title [XXI] is to provide funds to States
to enable them to initiate and expand the provision of child health assistance
to uninsured, low-income children in an effective and efficient manner that is
coordinated with other sources of health benefits coverage for children.

[51]SeeSBI Inc. v. Federal Communications Commission, 414 F.3d 486, 498
(3d Cir. 2005) (if an agency’s present interpretation of a regulation is a fundamental
modification of a previous interpretation, the modification must be
accomplished through notice and comment rulemaking); Shell Offshore Inc. v. Babbitt, 238 F.3d 622, 629 (5th Cir. 2001)
(a settled policy of an agency is binding on the agency and may be changed only
through a rule); Alaska Professional
Hunters Ass’n v. Federal Aviation Administration, 177 F.3d 1030, 1033-34
(D.C. Cir. 1999) (an agency is bound by settled interpretation given to its own
regulation that the agency can change only by rulemaking).

[52]SeeAppalachian Power Co., 208 F.3d at 1020-21 (if an agency treats a
pronouncement as if it were controlling, if it bases enforcement actions on the
policies in the document, and if it leads private parties or states to believe
it must comply with the pronouncement’s terms, it is a rule); Public Citizen, Inc. v. United States Nuclear
Regulatory Commission, 940 F.2d 679, 682 (D.C. Cir. 1991) (where language
and context of a statement are inconclusive, court will turn to agency’s actual
application to determine nature of agency pronouncement); McLouth Steel Products Corp. v. Thomas, 838 F.2d 1317, 1321 (D.C.
Cir. 1988) (because agency used policy statement to determine regulated
entities’ obligations, policy statement is, therefore, a rule); Guardian Federal Savings and Loan Ass’n,
589 F.2d at 666 (form of a regulation is not controlling; substance and effect
will determine whether agency statement is a rule).

[55]
“General statements of policy” are expressly excepted from notice and comment
rulemaking requirements under section 553 of the APA. In court filings submitted by the Department
of Justice in separate litigation, HHS contends that the August 17 letter is
not subject to notice and comment rulemaking requirements.

[60]See, e.g.,Chrysler v. Brown, 441 U.S. 281, 315 (1979) (“the central
distinction among agency regulations found in the APA is that between
‘substantive rules’ on the one hand and ‘interpretive rules, general statements
of policy, or rules of agency organization, procedure, or practice’ on the
other”); Professionals and Patients for
Customized Care, 56 F.3d at 596 (discussing whether policy statement at
issue is interpretative rule or legislative rule); Noel v. Chapman, 508 F.2d 1023, 1030 (2d Cir. 1975) (general
statement of policy is a rule directed at agency staff on how it will perform
discretionary function); Guardian Federal
Savings and Loan Ass’n, 589 F.2d at 666 (describing test for determining
whether “a rule is a general statement of policy”).

[61]See, e.g., Sugar Cane Growers Cooperative of Florida v. Veneman, 289 F.3d 89,
95 (D.C. Cir. 2002) (some agency pronouncements lack the firmness of a
prescribed standard to be considered rules); Syncor International Corp. v. Shalala, 127 F.3d 90, 94 (D.C. Cir.
1997) (the primary distinction between a rule and a general statement of policy
is whether the agency intends to bind itself to a legal position); Pacific
Gas and Electric Co., 506 F.2d at 37 (suggesting that policy statements are
not rules under the APA).

[63]Seeid. (what the agency in fact does in
relation to an agency statement is dispositive); United States Gypsum Co. v. Muszynski, 209 F. Supp. 2d 308, 309–10
(S.D.N.Y. 2002) (an advisory memorandum that was applied by agency as a rule
was a rule).

[67]SeeSyncor International Corp., 127 F.3d at 94 (a general statement of
policy does not impose, elaborate, or interpret a legal norm, but explains the
agency’s manner of enforcing the existing legal norm).